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Diary of a Fund Manager - Unfinished Business

Posted by on 03 July 2018
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Stepping away from the escalating trade war provides some perspective. This week’s Diary contains observations gleaned from the hedge fund and insurance sectors. Also, end of term reflections and some book recommendations for the beach.

The even balance between doubt and certainty that has dominated the investment agenda all year was on display yet again this week with markets down against a strong dollar. At the margin the pound was slightly weaker than the euro, bringing it back to where it started 2018. The certainty is that, all things considered, the global economy is in reasonable shape. The doubt is all about the impact of the US initiated trade war. The arithmetic of tariffs is easy to calculate. Unfortunately, it’s the knock on effect on intangibles such as confidence that are harder to judge. Investors, having initially ignored the rhetoric, are moving to discount lower economic activity. Hence the lack of progress so far this year. Escalation, however, is not in the price. Even mild mannered Canada, if a country can be described by a generalisation, is moving towards retaliation. A baker’s dozen of years ago when I started work at a Canadian bank, an early surprise was to find out just how concerned the locals were about US aggression. ‘When they need it, they’ll take our water’. Canada being classified as a threat to US economic security has scratched through the thin veneer of trust.

Last week presented several opportunities to get away from my normal day-to-day activities and, as they say, a change is as good as a rest. Over the years I have attended and, occasionally, contributed to the annual GAIM hedge fund conference. This year in London was the 24th gathering. The agenda covered a wide range of subjects with as much time spent on operations and risk management as investment. It is possible that hedge funds will provide a safe haven in a changing world, but picking the winning managers and strategies is hard. Predictability only becomes clear with hindsight. I couldn’t help reflecting on how different the mood was to the heady days of 2008-10 when those who had made investors and themselves a fortune during the credit crunch held centre stage in Monaco, explaining how they were going to do it again and then, after hosting a few excellent parties, headed off in their private jets. To quote Jane Austen; ‘where little minds belong to rich people in authority, I think they have a knack of swelling out, till they are quite as unmanageable as great ones.’

Although I may occasionally complain about over-regulation, most of what I am required to do is driven by common sense. It was, therefore, interesting to attend an insurance industry seminar at which I was able to interact with investment managers whose decisions are driven by rules specifically designed to keep policy holders safe. Security is vital and, as an investor in these types of companies, the efficient use of capital leading to generous dividend payments is very welcome. The problem with rules based investment is that judgement takes second place. Fighting the next war with tactics that worked last time is hardly a new mistake, but that’s the risk. Investment strategies based on assumptions developed during ten years of low interest rates and Quantitative Easing may not work so well in the next crisis. Liquidity is hard to predict and flexibility is an under-recognised investment tool.

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